ETFs vs. Individual Stocks, What Works Best for DIY Investing Beginners
So you’ve decided that this is the year that you’re finally going to start CRUSHING your finances and really take your money-game to the next level.
And you’re off to a great start. You’ve locked down a solid budget that you can stick to, you’re spending less money than you’re making and you’re aggressively eliminating your debts. One of the last big items on your “Financial Freedom” checklist is investing- otherwise known as “making your money grow for you without you doing any work.” Pretty much the greatest thing ever. What’s more is you’ll be going the DIY investing route. You’ve got it all figured out!
There’s just one problem…
You don’t have clue what you’re doing.
As someone who’s been there before, I know how overwhelming it can feel when you’re first trying to learn how to invest. After all, we were never taught this in school!
It also doesn’t help that the financial industry is NOTORIOUS for making this a miserable process for us do-it-yourselfers. They figure that with enough complex jargon and complicated charts with 87 different arrows, you’ll just say “screw it” and hire a financial advisor to do your investing for you (and make a killing off your account in the process).
It’s a pretty genius business model, actually. But don’t fall for it!
Since you’ve somehow found your way over to this personal finance blog, I’m guessing you have a little more initiative than the average Joe, and that’s a great thing. Because learning how to invest is a lot easier than you probably think.
First thing’s first, though:
New Investors Should Not Buy Individual Stocks
“Um, what? I thought investing was all about buying shares of companies in the stock market?!”
Well, yes. But hear me out.
When you decide to invest in specific stocks, say, Walmart or Amazon, you’re actually taking on a lot of risk. Think about what would happen if one of those companies had a bad quarter and profits were down. Investors wouldn’t be too happy, which means the value of the stock would fall (leaving you with less money). It’s not uncommon for the price of a stock to fall 5% or 10% in a day if something bad happens with the company.
If you put your money into only a few different stocks, it’s the same as putting all your eggs in one basket. If the stocks do well, great- you make a lot of money. But if they don’t, you’re gonna feel some pain. If you want to take chances with your money like that, at least have some fun and go to a casino with your buddies instead. Your investment portfolio is where you need to be a grown up and make smart decisions with your money.
If you want to protect your money better and still get growth, instead of ONE basket, what you need are a FEW HUNDRED baskets.
And it’s surprisingly way easy to accomplish this.
Exchange Traded Funds (ETFs) make it All Possible
So you get the “multiple baskets” concept, now it’s time to go out and buy a few hundred stocks, right?
That would be way too much work, and it would also cost you a fortune in trade commissions.
Ain’t nobody got time for that!
Instead, you can invest in what’s called an “exchange traded fund”, or ETF. They’re also sometimes called index funds.
An ETF is essentially 1 singular investment that holds tens, or often hundreds, of stocks.
An example of an ETF is the S&P 500 index fund with the ticker symbol SPY. This fund holds shares of all 500 companies in the famous “S&P 500” index, all within just one investment. So when you buy shares of SPY, you will only see that one item when you log into your investing account. But within that SPY holding, you are actually invested in 500 different companies.
The beauty behind this all is that if your beloved Walmart or Amazon stocks don’t do well, you’ve got 498 other stocks to back them up. Pretty nifty.
The investment company that actually builds the ETF for you charges a small fee, but it’s totally worth it. The SPY fund, for instance, charges only 0.09% per year, which is almost nothing. Or you could pay an advisor upwards of 2% to do virtually the exact same thing for you…
Keep It Simple
You shouldn’t need more than 3 ETFs to make a responsible, long-term portfolio that will make you money. A U.S. stock ETF, and international stock ETF, and a bond ETF is plenty.
Seriously, you can set all of this up in under 10 minutes and save yourself a fortune.
If you’re looking to learn a little bit more about this whole investing thing, but still want something you can understanding, check out the VTX Capital ebook, The Complete Guide to Building Your Own Investment Portfolio.
About the Author
Jeff began his career at a private wealth management firm before deciding years later that there was a better way for investors to manage their money. He started VTX Capital with the goal to educate and empower regular, everyday people to manage their own investment portfolios and financial lives.
Want to learn more about investing on your own? Open a brokerage account TODAY on my favorite trading platform, TradeKing.com (free to open) and nab your DIY investing guide below: